Tencent's 38% Meltdown May Be Just the Beginning

Chinese Internet giant Tencent Holdings Ltd (TCEHY), one of the biggest tech stocks with a $353 billion market value, has seen its stock fall 42% since reaching highs in January, amounting to hundreds of billions of dollars in losses. Tencent's plunge has eclipsed the percentage declines faced by both the U.S. tech titans and many of its domestic rivals. Now, the worst is yet to come for the Shenzen-based multinational conglomerate, according to a growing group of bears on the Street, as outlined by Bloomberg.

Tencent's Stock Collapse Could Get Worse

Stock

YTD Performance

Tencent

-31.5%

Apple

32%

Alphabet

6.4%

Amazon

54.4%

Facebook

-12.1%

Netflix

75.4%

Alibaba

-18.3%

JD.com

-44%

Mounting Headwinds Put Asian Tech Giant at Risk

While Tencent's technical charts look weak, the stock is still trading at 25 times projected earnings over the next 12 months, noted Bloomberg. This compares with its historic multiple closer to 20 on two other occasions when shares bottomed during major declines in 2011 and 2008.

Earlier this year, analysts were more optimistic on Chinese tech stocks including Tencent, Baidu Inc. (BIDU) and Alibaba Group Holding Ltd. (BABA), collectively known as the BAT stocks, despite rising trade tensions between Washington and Beijing, and a sell-off by Chinese investors. As for Tencent in particular, bulls cited the firm's wildly popular online games, messaging platform WeChat and burgeoning finance business. (For more, see also: Tencent Plunges 5% Amid Crackdown on Video Games.)

However, a slew of bad news which accelerated in August has turned the tides for Tencent, which returned over 67,000% from its initial public offering (IPO) in 2004 through January 2018. First, as the firm warned of weaker margins, one of the firm's oldest shareholders announced it was dumping its $11 billion stake. Amid a broader sell-off from Chinese investors, Tencent posted its first profit decline in a decade, while the company faced Chinese regulatory hurdles in launching highly anticipated games in China. Meanwhile, a weaker yuan and concerns over decelerating Chinese growth have weighed on the stock, which is largest in MSCI Inc.'s global emerging markets index. All of these factors led to the historic 38% decline in the company's stock price.

What's Next

Bloomberg noted that while all but one of the 49 analysts tracked by the firm rate Tencent at buy, the same analysts failed to predict the stock's current sell-off.

Moving forward, once bullish Asia tech investors will have to more carefully scrutinize these stocks before deciding where and when to buy. Tencent likely will soar long-term alongside a booming Asian market, but it should prove to be a volatile, and perhaps downward ride—signaled by the current 38% drop—in the shorter term horizon. (For more, see also: Why Alibaba, Tencent, Baidu Can Rise 20%.)

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